Michael Lewis on Goldman Sachs: The Company Would Flourish Under Totalitarian Rule

Serge Aleynikov remains the only Goldman Sachs employee since the 2008 financial meltdown to have actually served time in prison. How the Russian-born computer programmer came to spend a year behind bars at the behest of his former employer, Goldman Sachs, is the subject of contributing editor Michael Lewis’s article in the September issue of Vanity Fair, “Goldman’s Geek Tragedy.” Though Aleynikov was released on appeal in 2011, he was subsequently re-arrested on state charges the following year—even though those could conceivably carry a lesser sentence than the time he has already served. VF Daily caught up with Lewis to discuss Alenynikov’s disturbing tangle with the American justice system, why Goldman would flourish in Soviet-era Russia, and how high-frequency traders will inherit Wall Street.

__VF Daily:__In your article we see how Serge’s perception of the American dream changes. You started working at Wall Street out of college and now you are one of its critics. How would you say your vision of the American dream has changed?

Michael Lewis: I’ve never had a vision of the American dream. When you’re born into comfortable circumstances, it’s not a dream; it’s sort of your reality. My take on the world when I was a young man coming of age on Wall Street was that the world seemed widely screwed up to me. I came from a place where nobody really seemed to do anything and everybody was happy. I went into a place, Wall Street, where everyone seemed to be busy all the time and unhappy.

Maybe that’s what we have in common. We both came to Wall Street as outsiders. Neither one of us particularly thought of that as our life’s ambition. When I was pulled into it, every young graduate of Harvard, Princeton, and Yale was going to work on Wall Street for the first time. When he was pulled into it, every Russian programmer who could make things go fast was being sucked into Wall Street. We were both subject to this gravitational pull that was peculiar to the moment in Wall Street’s history.

Would you say that Serge’s story is the logical outcome of the financial crisis, or are those two things in contradiction to each other?

The judicial response to the financial crisis, especially the criminal and legal response, has been bizarre. But it’s always bizarre. The Justice Department in Manhattan, the D.A., they’re very good at certain kinds of cases. Insider trading, theft of property from a corporation, these are easier for them to take on and wrap their minds around than what was actually the center of the financial crisis.

In a funny way, the authorities, in response to not being able to prosecute the actual bad behavior that was actually really important, became more interested than they maybe should have been in peripheral cases that just happened to have Wall Street in the headline__.__He’s such a case. He has nothing to do with the financial crisis, except that he happened to work in the institution that is at the heart of it.

The Justice Department, more or less, mistakenly thought that on the surface, what he did was cut-and-dried, and that it was easy to prosecute.

They were right. You can put this guy in jail, especially with Goldman Sachs’s help. To me, the astonishing thing is that even after the financial crisis, Goldman Sachs can call the F.B.I., and on their word alone—about the value of what was taken, about the purpose of what was taken—get someone arrested two days later.

It seems that whatever makes large firms better at manipulating markets also makes them good at manipulation elsewhere.

[Laughs] I couldn’t get to the bottom of this, and Goldman’s people aren’t allowed to talk on the subject, but one day it’s going to be riveting to learn how Goldman Sachs, in 48 hours, managed to gin up this case and present it to the F.B.I. Who decided to do what and why? I’m not sure if it was all so malicious. I think it’s quite possible that Goldman itself didn’t know what he had taken, the value of it, the purpose of it, or anything else. As Serge says, there was no one at Goldman who actually understood the whole computer system. He said to me, “When I got there, there was a guy who seemed pretty well versed in everything. He left.” And there was such turnover at Goldman, and the system was such a hairball, that I think people knew pieces but they didn’t know the whole. Serge might have been as close as there was to an expert on the how the whole system worked. I think the valuable thing that Serge took when he walked out the door was himself.

There are many subtexts to this story. But one is how shocking it is that really gifted, talented people in Goldman are more valuable outside of Goldman—historically that hasn’t been true.

Goldman has always been the industry leader in financial instruments. Were you shocked to hear one of your sources say that Goldman’s high-frequency-trading system isn’t even among Wall Street’s Top 10?

For the better part of the year, talking to people in the industry, I kind of knew. I wasn’t as shocked because I have been watching the flow of people outside Goldman since the crisis. Actually, even before the crisis. If they see the people leaving, and they see some code going with them, I think they just are all the more likely to respond haphazardly, negatively, in a knee-jerk fashion

Goldman’s C.F.O., David Viniar, even said on an earnings call that the code Serge took had little value, that Goldman was fine.

So if it has no value, why are you so distressed? Why are you putting him in jail?

And then, the judge wouldn’t allow that statement to be read in court.

The judge was essentially—it seems to me the way the trial was run, reading the transcripts—a government hack. It felt deeply, intellectually dishonest. Or incompetent.

Do you think Goldman is almost Stalinist in influencing the government to be like itself?

*[Laughs.]*I think if you took lock, stock, and barrel, Goldman Sachs and moved it from New York to Moscow and forbade any employee from leaving so that they had to keep doing what they were doing but in a different context, I think they would flourish.

For the past 200, 250 years, prison has been an essential part of the Russian experience. Like Dostoyevsky and other Russian authors, and their heroes, Serge found some sense of purpose in his incarceration. Do you think an American could have come away from the experience with that same perspective?

In the 1950s, European filmmakers, when their films were going to be made for both a Russian and American audience, would change the ending. They would make a happy ending for the American audience and a tragic one for the Russian audience. There’s a photographer named Tacita Dean who has done a series of photographs called “Russian Endings” where she has played on this. I would say that in some ways, there’s something in the water in Russia that enables you to derive a kind of pleasure from a tragic experience. That is not in the water in America. A kind of richness from a tragic experience. And whatever chemical is in the water, Serge drank plenty of it. He is very persuasive on the subject that this was not an all-together bad experience for him. It woke him up to many aspects of life that he had previously been asleep to. I believe him. I don’t think it’s just superficial rationalizing.

When you’re with him, it’s shocking how without anger or bitterness he is. You would never guess, at the dinners I had, that he was one who spent time in jail. You would have picked every other person there.

Do you think he’ll go back into finance, assuming that New York State drops the case?

I think he’s extraordinarily valuable because of his combination of skills and the way his brain works in high-frequency trading. It’s not just a stock-market phenomenon. Algorithmic trading is going to overrun all the markets. It would be very hard for him to resist his own value there if he was allowed to do it. I know people who want to hire him and they are not hiring him for appearance’s sake.

As opposed to the requisite courtroom scene that might appear in an article like this, you instead assembled your own jury, made up of other programmers and people familiar with high-frequency trading, to level a judgment. Were you surprised by their verdict?

I honestly didn’t know what was going to happen when I put them all in a room. I knew they were pretty aggressive people. They would ask questions I wouldn’t even know to ask, and they would understand the answers in a way I couldn’t understand them. I couldn’t include every last response they had to him, but one member of the jury retained his suspicions. His suspicions weren’t based on anything Serge had done. They were based on the fact that he’d seen some Court TV reality thing where some woman had killed her children, and he said he saw exactly the same expression on her face that Serge had on his. Based on that facial expression, he judged Serge guilty of something—he just didn’t know what.

So, proponents have argued that high-frequency trading has made markets more liquid.

Hah!

Critics say it has become more volatile. Who exactly is hurt by the competitive advantage offered by high-frequency trading?

It’s essentially a tax on productive investment, and it’s a tax that’s largely unnecessary. The reason people aren’t more outraged about it is that the cost of financial intermediation in the stock market—the old-fashioned stockbroker system—has gone down because of the technology. There is this whole separate question, which I’m actually not prepared to answer right now: has it introduced new instabilities in the markets for which we all pay a price? I suspect so, but I don’t know. What I know is not true is that high-frequency trading provides liquidity.

There’s a line in The Big Short; one of the characters, who was cynical about the subprime-mortgage market, says, “When I hear Chinese Wall, I think you’re a fucking liar.” I feel that way about liquidity. When I hear the word liquidity, I think you’re a fucking liar. If this is liquidity, we don’t need it.